Indian Resident as UAE Company Director: An Indian citizen who wants to be the director of a company incorporated in the UAE, including Dubai, can do so depending on the corporate, immigration, foreign exchange and taxation laws of the UAE. The legal situation becomes rather tricky in a case where the individual not only acts as a director but owns shares or invests capital, gets paid for being a director, and controls the foreign entity from India. It becomes especially critical in light of India’s FEMA law and the OI policy announced in 2022.
Appointing a director to the board of a foreign entity without buying shares in that corporation does not, by itself, constitute an overseas investment. Yet, subscribing for, or purchasing equity of the UAE entity would qualify the transaction for ODI treatment.
Can an Indian Resident Become a Director of a Dubai Company?
Indeed, an Indian national can accept the directorship in a UAE company insofar as the appointment meets the relevant incorporation rules and other requirements of law. Firstly, one needs to consider the form of the appointment. One could either act as an independent director, a non-executive director, an executive director or a shareholder-director. These appointments come with different liabilities and implications.
For instance, a professional from India may be appointed as a director in a Dubai corporation without having to acquire any share in the company. This means that, by itself, the appointment will not qualify as an investment.
That said, the situation becomes entirely different in case the individual accepts shares during the process of the appointment or invests money in the corporation. A director who has no shares is in a totally different situation from one who is a shareholder as well. Also, the directorship comes with certain income-tax liability for the individual depending on the circumstances of his/her appointment. What is important is the position of the individual and not the designation stated in the records of the corporation.
Understanding FEMA and Overseas Direct Investment Rules
FEMA oversees foreign exchange transactions conducted by Indian residents. The Overseas Investment Rules, Regulations, and RBI guidelines provide the structure for permissible investments and financial commitments abroad.
According to the Overseas Investment Rules 2022, ODI is typically an equity investment in an unlisted overseas entity or an investment in a listed overseas entity that satisfies the requirements as per the provisions. Some investments might also be treated as ODI due to control by the investor.
Thus, an Indian resident investing in shares in an unlisted Dubai company will need to first consider the structure of ODI. This includes assessing the eligibility of the business and the proposed investment, the quantum and nature of investment, and contacting the designated Authorised Dealer Category-I Bank for completing the prescribed forms, including Form FC.
What Happens If Shares Are Required for the Directorship?
Certain corporations may make it mandatory that the director holds shares under the constitutional documentation or any other related provisions. In case an Indian resident is required to invest in shares for his appointment as a director, then such investment should not automatically become exempt from FEMA just because the shareholding is nominal.
For instance, if a corporation based in Dubai mandates the person who wishes to become a director to purchase 1% shares in the business, then he might view this sum as negligible in comparison with the total amount of money invested in the company. However, he should still consider all the provisions relating to overseas investments.
They include whether the company is an eligible foreign corporation, whether the intended investment constitutes ODI, whether the individual satisfies all the necessary criteria and how the investment will be made.
Qualification Shares alone do not indicate the investment to be exempt. The best practice in this situation would be to consider the provisions of the corporate documentation, share subscription documentation and investment scheme before appointing him.
Can an Indian Resident Use the Liberalised Remittance Scheme?
Under the Liberalised Remittance Scheme (LRS), eligible resident individuals are allowed to effect permitted foreign exchange remittances under the stipulated rules. The general limit under the LRS is USD 250,000 per financial year per resident individual for permitted remittances. The USD 250,000 LRS limit is not an independent limit for each foreign company or investment, but the eligible remittances under various categories must be considered in totality.
In case of an investment by a resident of India into a Dubai-based company, the applicability of the Liberalised Remittance Scheme (LRS) may be relevant to the remittance, provided that such investment meets the provisions of the Overseas Investments and relevant conditions. Merely having the limit under LRS does not render all overseas investments permitted.
For instance, an individual cannot assume that an investment in a prohibited or ineligible foreign business will become lawful merely due to the amount of remittance being below USD 250,000.
Prior to making the remittance, the individual is required to verify with the authorised dealer bank regarding the applicable route, documents, reporting norms and applicability of the USD 250,000 LRS limit. The individual is required to maintain the records of the remittance and foreign investment.
Is an Indian Resident Director’s Income Taxable in India?
Remuneration to a director from a company located in the UAE could be taxable in India. It would depend on the residential status of the individual under Indian income tax laws, the character of the income, the place of performance of services and the provisions of the applicable double taxation agreement.
An individual qualifying as ROR in India is normally taxed on his total income, depending upon applicable laws and double taxation agreements. This means that merely having director remuneration in a bank account in the UAE does not necessarily mean that such remuneration is exempt from Indian tax.
Some possible forms of remuneration include fees as a director for the services provided, salary as a director for managerial responsibilities, performance-based bonus, board meeting fee and any other compensation provided through the contract.
Each form of remuneration has to be categorised and recorded appropriately. As an illustration, if an Indian resident earns director remuneration in connection with his management of a Dubai company but performs these activities mainly in India, then income tax treatment has to be considered in view of the residential status of the individual and services rendered.
UAE Corporate Tax Rules for Director Remuneration
The UAE has its own Corporate Tax structure that can impact the tax implications for the corporation paying remuneration to its directors. Where the UAE company makes payments such as salary or any form of remuneration to the director who is at the same time the shareholder or a related person, the matter should be considered from the point of view of the relevant Corporate Tax legislation.
The remuneration should be reasonable, properly approved, and there should be supporting documentation. Supporting documents may include service agreement of the director, Board resolutions, payroll documentation and services rendered by the director.
The remuneration of the director does not necessarily mean a business expense just because it has been recorded in the books of the corporation. It all depends on the relevant UAE tax laws and the factual circumstances. It is also very important to separate corporate and individual tax considerations. The Corporate Tax status of the UAE company cannot, in itself, determine the manner in which the remuneration of the director will be taxed in India.
Can a Minority Shareholder Exercise Control Over a UAE Company?
Shareholding percentage does not determine control alone. It is possible for an Indian national to have a minority shareholding in a Dubai company but exercise a lot of control through a shareholders’ agreement, voting process, or ability to appoint directors. For instance, a person who holds a 30% shareholding in a company could have contractual authority to appoint most of its directors.
This authority would be important in establishing control based on the applicable law. This is because the issue of control determines how the investment is classified as well as the conditions that apply to the foreign company and its subsidiaries. An investor needs to consider the company’s articles of association, shareholders’ agreement, voting, and management process, and not just the shareholding percentage.
What If the UAE Company Establishes Foreign Subsidiaries?
It is more complicated in the case where a firm in Dubai sets up its subsidiaries abroad. Let us look at a scenario whereby an Indian resident decides to invest in an entity based in the UAE. Then this UAE company sets up its subsidiaries in either Saudi Arabia or the UK, or in any other place.
In such a situation, the investor should check what the ODI provisions for subsidiaries and step-down subsidiaries stipulate, especially in the case of residents. In some cases, certain restrictions might apply to acquiring control of foreign entities under particular circumstances. In other words, a simple structure may become complicated once the UAE company begins its operations in foreign countries. An entrepreneur intending to set up a holding company should consider his plans before making the original investment structure.
Indian Resident as UAE Company Director: Does a Director Need a UAE Residence Visa?
Board membership and immigration are distinct areas of law. Just because someone becomes a board member does not mean that the question of his residence visa or work permit has been resolved. It depends on what the UAE jurisdiction is, on the licensing of the company and on the nature of the duties.
For example, there will be a difference between a non-executive director attending meetings only once or twice per year and an executive director running operations in Dubai. Prior to engaging in any activity in the UAE, it is necessary to determine the particular requirements of the UAE immigration and work permit laws. The appointment should be designed based on the individual’s actual duties.
Place of Effective Management: A Major Tax Issue for India. One of the most important tax issues for an Indian resident running a UAE company is the notion of the Place of Effective Management (POEM).
Place of Effective Management: An Important Indian Tax Risk
One of the most critical tax issues for an Indian resident controlling a UAE company relates to the Place of Effective Management (POEM) principle.
According to Indian Tax Law, POEM might become important when considering the tax residency of a foreign entity. In general, POEM can be defined as a location where the key management and business decisions that are required to run the business of the entity in question are being made.
Let us take, for example, the case of a company incorporated in Dubai but holding a UAE trade license, registered office, and bank account. At the same time, an Indian resident director who makes all important business decisions sits in India.
This person approves all agreements, sets prices, makes strategic investments, and takes other financial decisions. The UAE board of directors just puts signatures on these decisions after they have been made.
Common Compliance Mistakes Indian Residents Should Avoid
Indian entrepreneurs setting up businesses in the UAE may be able to mitigate some regulatory risks by addressing the investment and tax issues prior to consummating the deal. A common mistake is the assumption that the directorship automatically triggers ODI. If the director is not a shareholder, he or she does not normally make an investment simply by holding the position of a director.
The actual situation still needs to be reviewed for possible financial or other considerations of the individual. Another mistake is the failure to consider even a small shareholding. Even a relatively small subscription of shares to the equity of an unlisted foreign company might require ODI compliance. Indian individuals need to be careful about the taxation of their foreign income. Their director fees or salaries earned in the UAE could be subject to tax in India, depending on the individual’s residence status and relevant law. Lastly, the money of the company should not be treated as their own personal money. Salaries, director fees, dividends, loans, and expense reimbursements are treated differently.
Practical Checklist Before Joining a UAE Company’s Board
Before accepting a directorship, an Indian citizen should examine the proposed structure very closely.
- Find out if the appointment requires any shares, capital investment or any other sort of financial stake.
- See if there is an applicability of FEMA, ODI and LRS with regard to the proposed structure.
- Ensure the documents, procedure for remitting funds and other information with the authorised dealer bank.
- Find out about the income tax liability in India, UAE Corporate Tax and other provisions of the treaty.
Gather information about the rights of governance, remuneration, bank powers and where the decision-making process of the company will take place.